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Page 53 the distribution by another manufacturer of competitive goods, or to deprive the public of improvements in distribution. The Committee go on to recom- mend that the appropriate Government Departments should invite consultations with the principal national organisations in trade and industry to consider the most satisfactory means of ensuring that resale price maintenance is administered in such a way as to maintain an adequate distribution of goods and at the same time to provide for such price reductions as are justified by low cost distribution or by a regular policy of distributing surplus profit to the customer.

5. The Committee's second main recommendation deals with collective action taken by trade associations to enforce resale price maintenance. The methods used by trade associations are described in the body of the report; they include fines, loss of privileges, special discounts for retailers who buy only from members of the association and, in particular, "common stop-lists," by the use of which a distributor who cuts the price of one price-maintained article auto- matically loses his supplies of all the products of all the association members. The Committee see no justification for these collective measures, which in their opinion have impeded the development of economical methods of trading and prevented the reduction of distributive costs and prices. They recommend, there- fore, that steps be taken to render illegal the application of sanctions which extend beyond the remedies open to an individual producer for any breach of resale price maintenance conditions.

6. We consider that the broad principle of these conclusions should be strongly endorsed by the Government. Their implementation is essential to the free growth of new and more economic methods and should make a real contribution to the reduction of distributive costs over a large field of consumer goods. It is true that there are arguments for abolishing resale price maintenance altogether, as indicated in Mr. Henry Smith's qualifying note to the report (reproduced as Appendix C). There is insufficient evidence, however, to show that resale price maintenance, if reasonably administered by an independent manufacturer, has enough harm in it to justify its abolition. The possibility of complete abolition should not be ruled out, but it is fairly certain that any attempt at the present time to overthrow completely a system which undoubtedly has certain advantages and which is so deeply rooted in the present distributive structure would do more harm than good.

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7. There is reason to believe that the publication of the evidence contained in the report, and a firm indication of the Government's intentions will, in them- selves, have a salutary effect and will lead at the very least to a halt being called to the development of new collective resale price maintenance associations. There is a good chance that discussions of the kind recommended by the Committee will produce substantial results. The purpose of these discussions, to which, in consultation with the Minister of Food, the President of the Board of Trade proposes to invite representatives of the Federation of British Industries, National Union of Manufacturers, Association of British Chambers of Commerce, the Co-operative Movement, and other national organisations concerned, will be to ensure that resale price maintenance by individual manufacturers is reasonably and flexibly operated, and that it is limited to its proper functions, in particular the prevention of "loss-leader" selling. It will be made clear from the start that if resale price maintenance is to be allowed to continue at all, discrimination against Co-operative Societies must cease, and the public must be allowed to reap the benefit of new techniques of low-cost distribution, especially self-service methods, by way of lower retail prices. These discussions will it is hoped result in agreement on a code of behaviour for individual manufacturers who wish to maintain resale prices for their branded goods.

8. It is too much to hope that persuasion and education can be fully effective in abolishing collective resale price maintenance, but the nature of the action required for this purpose will depend to some extent on the success of the dis- cussions referred to above. At some point we must expect to have to employ statutory means to deal with collective resale price maintenance, and these might take the form of either-

(a) An order under Defence Regulations such as that set out in L.P. (46) 232,

and approved at a meeting of the Lord President's Committee on.. 27th September, 1946 (L.P. (46) 31st Meeting, Minute 3) prohibiting Page 53 difcination against Co-operative Socleaige 53 of 366

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This method would not be suitable for dealing with the whole garage of 4cafede resale price maintenance activities and there are, in any case, obvious political objections to using Defence Regulations at this time as a weapon of industrial policy.

(b) References to the Monopolies Commission.

Three cases (electric lamps, builders' castings and dental goods) in which collective resale price maintenance agreements play a sub- stantial part are already under investigation by the Commission, and in view of the Commission's heavy programme of work, we propose to await their first reports before referring any new cases. Some other cases where distributive trade associations play a big part (including in particular the Proprietary Articles Trade Association, which is virtually the founder of resale price maintenance associations), should at some point be referred to the Monopolies Commission on account not only of their resale price maintenance elements, but also of the many other restrictive practices involved, and action against such bodies following Monopolies Commission reports would doubtless have a salutary effect on other trade associations of a similar kind. But this method of dealing with the problem would undoubtedly be slow, since it could only proceed trade by trade, and if industry felt that no other means would be employed it is improbable that they would go far to put things right before references to the Commission were made. (c) Special legislation, which might deal not only with resale price main- tenance but also with other restrictive practices in the distributive trades-for example, "loyalty rebates" (by which associations attempt to prevent distributors from handling the products of independent manufacturers) and "trade lists" (in which restrictive definitions of wholesalers and retailers who may be supplied by association members are used to restrict entry into the distributive trades).

Such legislation, while difficult to frame and fit into the present legislative programme, could be introduced early in the lifetime of the next Parliament.

9. A decision which of these statutory means to use, if and when education and persuasion prove ineffective, need not be taken until we see how the report is received and what action industry may itself take on it. Moreover, a public declaration of the Government's intention to make collective resale price main- tenance illegal would place the Monopolies Commission in a most invidious position. The Commission is at present charged with the task of investigating certain industries in which resale price maintenance plays an important part, and they have the statutory duty to report on the effect on the public interest of these and other arrangements in the industries concerned. It is perhaps improb- able that their conclusions on the resale price maintenance aspects of these individual cases will be any different from those of the Lloyd Jacob Committee, but if the Government were to announce that they had already made up their minds on one of the principal points on which the Commission had been asked to advise, such a course could hardly fail to damage the Commission's status with industry, while the Government would be open to attack on the grounds that within a year of the Monopolies and Restrictive Practices Act coming on the statute book they were by-passing the Act's main instrument. Furthermore, in view of what is said in "Labour Believes in Britain " (Chapter III, paragraph 6 (b)) about action to deal with minimum prices in the distributive trades, the next Parliament would be the appropriate time for abolishing collective resale price maintenance.

10. The President of the Board of Trade feels, therefore, that while the Government should welcome the broad principles of the report's recommendations, we should avoid committing ourselves to action to make collective resale price maintenance illegal until after the Monopolies Commission has reported on the current batch of cases in which this practice is of importance. By that time-- and the Chairman of the Commission has been asked to give priority to the investi- gations into these cases-industry's reaction to the report will be clear, the discussions designed to implement the Committee's first recommendation will be well under way, if not already concluded, and it should be very much easier than it is at present to see exactly how and when the outlawing of collective resale price maintenance should be tackled.

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The President of the Board of Trade proposes, therefore, subject to his colleagge 5efs366make a statement in the House, magédiately after publication of the report, on the lines of the draft at Appendix D. This makes it clear that:

(a) The Government accept the broad principles of the conclusions and

recommendations of the report.

(b) Discussions with the trade organisations concerned will be initiated to ensure that in future individual resale price maintenance should only be operated reasonably and flexibly, and that in particular discrimina- tion against Co-operative Societies must cease and provisions must be made for the public to reap the benefit of self-service and other low- cost shops.

(c) Industry itself should take heed of the report's evidence, conclusions and recommendations on the subject of collective resale price maintenance, but if this process of education and persuasion fails, the Government will take action to ensure that the general public do not suffer from the private restriction of price competition.

Board of Trade, Millbank, S.W.1,

16th May, 1949.

J. E.

APPENDIX A

TERMS OF REFERENCE OF THE COMMITTEE ON RESALE PRICE MAINTENANCE

to consider the practice by which minimum wholesale and retail prices or margins for the resale of goods are fixed by producers, and its effects on supply, distribution and consumption, and to report whether in the light of present conditions, and particularly of the need for the maximum economy and efficiency in the production and distribution of goods, any measures are desirable to prevent or regulate its continuance."

APPENDIX B

EXTRACT FROM THE COMMITTEE'S REPORT

Conclusions and Recommendations

159. Our enquiry has revealed a conflict between two

two apparently contradictory aims the need on the one hand to encourage the development of more economical methods of distribution and the reduction of retail prices and on the other hand to maintain the quality, continuity or production and ready supply to the public of established British brands.

160.

We are satisfied that the elimination of price competition over the greater part of the distributive trades is not consistent with the need for the maximum efficiency and economy in production and distribution so necessary in the present economic circumstances. Bearing in mind, therefore, the probable continued growth of branding and standardisation, we have been concerned to find some solution which would mitigate the harmful effects of resale price maintenance as now in operation and guarantee a substantial degree of flexibility in the distributive structure.

161. In arriving at our conclusions we have drawn a distinction between the fixation and maintenance of resale prices by an individual manufacturer and the collective administration of resale price maintenance schemes. The effects upon the public interest of these two methods of maintaining prices and their impact on the economy are, in our opinion, different.

162.

We take the view that the manufacturer of a branded article remains

responsible for the quality of the goods sold under his own brand, he cannot,

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therefore, bepindifferent to the terms on which his goods are sply to the public. Our evidence has shown that well-known branded articles are particularly fiable to be used as loss-leaders by distributors and we are satisfied that their use in this way has not brought any permanent advantage to manufacturers, distributors or the shopping public as a whole. Resale price maintenance offers a convenient means of protecting brands against misuse by distributors in this or other ways.

163. We recommend that no action should be taken which would deprive an individual producer* of the power to prescribe and enforce resale prices for goods bearing his brand.

164. Producers are not, in our opinion, entitled to use resale price main- tenance to obstruct the development of particular methods of trading, to impede the distribution by another manufacturer of competitive goods or to deprive the public of the benefits of improvements in distribution. Public policy requires adequate distribution of goods with provision for such price reductions as are justified by low cost of distribution or by a regular policy of distributing surplus profit to the customer.

165. We recommend that the appropriate Government Departments should invite consultations with the principal national organisations in trade and industry to consider the most satisfactory means of ensuring that this policy is made effective.

166. We can find no adequate reason to justify a manufacturer either in interfering with the terms on which the distributor disposes of another manu- facturer's goods or in surrendering any part of his interest in the resale prices of goods bearing his brand for this purpose. Collective price maintenance schemes appear to us to have led to the comprehensive regulation of competition in the distributive trades and to have impeded the development of economical methods of trading and prevented the reduction of distributive costs and prices. Associa- tions of traders designed to bring their collective power to bear to maintain their members' prices are, in our view, undesirable and we note that the Commission set up under the Monopolies and Restrictive Practices (Inquiry and Control) Act, 1948, has already been asked by the Board of Trade to investigate two of the industries from which we received evidence.

167. We recommend that steps be taken to render illegal the application of sanctions which extend beyond the remedies open to an individual producer for any breach of resale price maintenance conditions.

APPENDIX C

NOTE BY MR. HENRY SMITH

1. I support the recommendations adopted by my colleagues, as I consider that they represent a marked advance from the present position. I cannot, however, without some reservations, accept their interpretation of the evidence given before us, nor admit the whole of the logic by which they reach their conclusions.

2. In my opinion the criticism of resale price maintenance which some of our witnesses presented, and which is set out in 51 to 109, is entirely convincing. Whether enforced by an individual manufacturer or by a trade association, it inevitably leads to retail prices being higher than they would otherwise be in areas and under conditions where distribution costs are low, and to an unnecessary proliferation of retail outlets. The recommendations of our report, if adopted, will lessen these evils, but will, in my opinion, only remove them if it proves impossible for resale price maintenance to be operated without the support of trade associations.

3. I am satisfied that the manufacturer of a branded article is interested in his product being sold to the public on terms which maximise the continuity and stability of production, and that he often believes that this is most easily achieved

* We use this word to include manufacturers, wholesalers, growers, importers, &c. (see foot- note (1), page Pour resemmendations chiefly relate to manufacturers and the W3ggk goods with their own brand.

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by fixing a uniform selling price. The selling price which he chooses is, however, in my opinion flilly to be that which will maximisphie grofits.36do not mean by this that he will seize upon every opportunity ruthlessly to exploit the public, regardless of the consequence to himself or them, nor that no other considerations will influence his conduct, but that one may in general expect that self-interest, however enlightened, is likely to provide his dominant motive. The producer of a branded product enjoys to a certain extent a private market, and can thus choose the price which he will charge, at the expense of losing sales or increasing advertising costs if he sets a higher rather than a lower price. The fact that we have not encountered a perfect monopolist engaged in exploiting the public (to which reference is made in paragraph 115) does not surprise me, nor does it lessen the weight of the argument. Having chosen the retail price most attractive to him, if the manufacturer is free to maintain it by withholding supplies from distributors who do not accept his decision, his opinion is substituted for the impersonal forces of the market.

4. The public are interested in paying no more than the necessary cost of distribution, including fair competitive profits to the distributor. As the costs incurred by distributors are not uniform, the public interest is in conflict with that of the manufacturer in uniform prices. But certain aspects of these two interests, that of the manufacturer and of the public, may coincide if the effect of price competition is to disrupt the continuity of production to such an extent as to increase the cost of production by more than it reduces the cost of distribution. Here I distinguish between ordinary price competition, in which the distributor expects a share in his overhead costs to be provided by all sales, and the use of loss-leaders, of which the name is self-explanatory. If competition of the former kind is in operation, and the basic assumption of a free enterprise economy is that it is normal, I believe that the public interest is served by its free play. Competition of the latter type may be against the public interest: both may cause embarrassment to the manufacturer. If, however, a distinction is to be drawn between the two, the responsibility should not be left to the manu- facturer, whose interest is not necessarily identical with that of the public.

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5. I am impressed by the evidence presented by manufacturers to the effect that the use as

loss-leaders of branded goods of which the normal retail price has been widely advertised may break down the continuity of production upon which low-cost production largely depends, although I am not convinced that the practice of selling at uniform retail prices does not contribute to the problem by providing a background against which price-cutting is obvious, and thus strate- gically effective. I cannot, however, accept the implied view of my colleagues that the two contradictory aims of reducing distributive costs and maintaining the supply of branded goods cannot be subjected to comparative evaluation. The influence of resale price maintenance is continuous and actual, while the disturbing effect of price competition upon the sale of branded goods may only operate occasionally. This is of particular importance in the circumstances of the present time when we are faced with an apparently intractable shortage of labour in the basic industries at the same time that the absorption of labour by distribution is a cause of concern. Moreover, on the evidence presented to us I would hold that the effect upon the continuity of sales is the same whether price competition be legitimate," ie., reflecting low costs of distribution,. or strategic," i.e., resulting from sales below cost intended to attract custom. Thus to accept in principle the right of the manufacturer to determine retail prices is also to deny in principle the usefulness of competition in the distributive trades.

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6. It is only because I do not think that legislation designed to limit the use of loss-leaders would be easy to frame, or practicable to operate, that I am prepared to support the recommendations of my colleagues that resale price maintenance should be allowed to continue in a restricted form. But I consider that the evil consequences of resale price maintenance in its present form greatly outweigh the evil consequences which might result from an extension of even the most reckless price competition by distributors.

In my view even the power left to the individual manufacturer by these proposals may prove to be more harmful to the public interest than would be the complete restoration of free price competition in theafstributive trades.

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DRAFT STATEMENT IN THE HOUSE OF COMMONS: RESALE PRICE MAINTENANCE

Q: To ask the President of the Board of Trade when the report of the Committee on Resale Price Maintenance is to be published and whether he has any statement to make on it.

A: The report was published to-day and I take this opportunity of thanking the Chairman, Mr. Lloyd Jacob, K.C., and his colleagues, for their most valuable work.

Resale price maintenance is a feature in some of the cases now referred to the Monopolies and Restrictive Practices Commission; its effects in these instances and its connection with the wider arrangements which the Commission are investigating will doubtless be fully considered. It is, however, by its cumulative effect on the national economy rather than by its impact on individual trades that a practice so widespread as resale price maintenance must be judged, and it is only by a comprehensive review that industry can itself be guided. This special Committee was therefore set up in advance of the legislation under which the Monopolies Commission has now been established.

The report, which is unanimous, reaches two main conclusions. First, no action should be taken which would deprive an individual producer of the power to prescribe and enforce resale prices for goods bearing his brand, provided this power is not used to obstruct the development of particular methods of trading, to impede distribution by another manufacturer of competitive goods, or to deprive the public of improvements in distribution. Secondly, steps should be taken to render illegal the application of sanctions which extend beyond the remedies open to an individual producer for any breach of resale price maintenance conditions.

The Government accept these conclusions in broad principle.

I propose, therefore, in consultation with the Minister of Food to adopt the Committee's suggestion and invite the principal trade organisations concerned to consider the most satisfactory means of ensuring that resale price maintenance by an individual producer is exercised in a reasonable manner and is limited to its proper functions. In these discussions I shall make it clear that discriminatory restrictions against consumer dividend or discount systems employed by the Co-operative Societies and others must be abolished, and that the public must be allowed to reap the benefit of low-cost methods of distribution (in particular self- service shops) by way of reduced retail prices.

The Committee's second main recommendation, for the abolition of collective resale price maintenance, is based on evidence of the existence of a widespread system of trade association controls, whose scope, complexity and cumulative restrictive effects may surprise even those with long experience in the distributive trades. This evidence should convince manufacturers and traders that their own interests, as well as those of the country, will be best served by freeing distribution from the many self-imposed restrictions and controls described in the report. I hope indeed that in the next few months we may see industry organising some "bonfires" of its own. I must make clear, however, that, although we have every reason to hope for the co-operation of industry in this matter, the Government are fully determined to ensure that the general public shall not suffer from the private restrictions of price competition.